General Cigar Holdings, Inc. Business Information, Profile, and History

Company Perspectives:

General Cigar Company is the largest manufacturer and marketer of premium, imported, hand-made or hand-rolled cigars--those made with long filler and all natural tobacco leaf. Through another subsidiary, Culbro Tobacco, it grows, cures, ages and processes the majority of the Connecticut Shade tobacco in the world.

History of General Cigar Holdings, Inc.

General Cigar Holdings, Inc., makes and markets imported handmade and hand-rolled premium cigars made with long filler and all natural tobacco leaf. The company's most popular brands include Macanudo, Punch (MPP), Hoyo de Monterrey, Cohiba, and Partagas. Through its subsidiary, Culbro Tobacco, it grows, cures, ages, and processes the majority of Connecticut Shade tobacco in the world. The company also owns Club Macanudo cigar bars in New York and Chicago. Once known as Culbro Corporation General Cigar Holdings is 65 percent owned by Swedish Match AB. The remaining shares are held by the Cullman family, which founded the company.

1840s-1940s: Origin and Development of Family Cigar Business

Tobacco and the Cullman family have been intertwined since the mid-19th century. In 1848, during the time of revolution in Europe, Ferdinand Kullman, a wine merchant from Germany, immigrated to the U.S. In America, he continued to sell wines and, according to family history, began selling cigars as well. He changed the family name to Cullman.

Ferdinand's son, Joseph, began working at age 14 for a tobacco merchant in New York City. He was involved in buying and selling leaf tobacco. His work became prosperous enough for him to send his son, also called Joseph, to college. In 1904, Joseph Jr. graduated from school and entered the tobacco business. Called "Mister Junior," the young Cullman began buying a variety of tobacco, including Havana seed, Connecticut broadleaf, some Cuban tobacco, and also tobacco grown in Ohio and Wisconsin. He followed his father by importing Sumatra tobacco from the Dutch East Indies, and traveled to tobacco auctions in Amsterdam for Indonesian wrapper tobacco.

In 1906, the Cullman family formed its cigar-making operations into the United Cigar Manufacturers Company. It was listed on the New York Stock Exchange that same year. Soon, Joseph Cullman Jr. became interested in another aspect of the tobacco business, namely tobacco-growing in Connecticut. Although tobacco for cigars was already being grown there, the type was Connecticut broadleaf, a dark, maduro-style wrapper. Joseph began growing Havana seed (or Cuban seed, as it was also known) in the fertile Connecticut River Valley fields, and the wrapper that grew was lighter. Before long, it became very popular with cigar consumers, and the Cullmans became one of the largest growers of wrapper leaf in the entire state.

United Cigar Manufacturers grew quickly in its first decade; it paid its first dividends in 1909, aided by a series of acquisitions of other cigar makers. This all took place at a time when the cigar industry itself was undergoing a rapid consolidation, especially among the largest tobacco companies, including American Tobacco and Consolidated Cigar Corp. In 1917, United Cigar Manufacturers changed its name to General Cigar Co., Inc., to reflect its growing holdings.

The following year, General Cigar moved to change the face--and structure--of the U.S. cigar industry. Before the early 1920s, cigars had been primarily sold as local brands or under private labels. Across the United States, there were hundreds of small-volume cigar names. General Cigar alone represented about 150 different brands. In 1918, the company moved to establish the first national cigar brands. It dropped nearly all of its brands, and instead concentrated on the manufacturing, sales, and advertising for five core brand names. Each of General Cigar's brands--which included White Owl, Van Dyck, Wm. Penn, and Robt. Burns--hit a different price point. Advertising became important; General Cigar was among the first companies to recognize the potential of the new radio networks that were developing. General Cigar was soon sponsoring radio programs and announcing its products on a national scale. The company's net profits rose from $1.5 million in 1914 to $2.7 million by 1919. Cigar sales were on the rise throughout the country, reaching a high of 8.5 billion cigars sold in 1920.

During the 1920s, the cigar industry began to suffer from image problems. The rise of organized crime during Prohibition, and the image of the stogie-chomping gangster--developed in part by Hollywood, and personified by such actors as Edward G. Robinson--gave the cigar an aura of disrespect among the public. Later that decade, the cigar industry faced a second crisis, when American Tobacco began promoting new, machine-rolled cigars. Its advertising asked: "Why run the risk of cigars made by dirty yellowed fingers and tipped in spit?" The image proved disastrous for the cigar industry as a whole. Cigar makers rushed to convert their manufacturing from hand-rolled to machine-rolled products, but cigar sales plunged through the 1930s. During this same time period, the cigar industry was hit hard by the rise in cigarette use across the United States. Cigar consumption never recovered to its early 1920s peak. General Cigar saw its sales fall steadily. While in 1924, General Cigar had posted sales of $23.7 million and a profit of $2.3 million, by 1939, its fortunes had dropped to less than $19 million in sales, with a slight $880,000 profit.

The cigar industry fought to improve its image, organizing the Cigar Institute of America in 1940. As the United States prepared to enter World War II, the cigar's image was helped by Winston Churchill's ever-present cigar. Also, Hollywood was coaxed to take cigars away from its movie villains, and give them instead to heroes. More and more, cigars became props for the film industry's romantic leads, softening the public's--and especially women's--resistance to cigars. General Cigar's sales climbed again, to $22 million in 1941, and $27 million in 1943. The following year, General Cigar again jolted the industry with the rollout of its Robt. Burns Cigarillo. The Cigarillo was a scaled-down panatela cigar, resembling more closely a cigarette than the old-style stogie. Wrapped in a lighter-shade wrapper tobacco, it had a milder taste than the traditional cigar. The Cigarillo helped pull General Cigar's revenues up to $35.6 million by 1947.

In the 1940s, another generation of the Cullman family followed the cigar making tradition. Edgar Cullman, who had been employed in the U.S. Treasury in Washington, made a decision to return home and begin working in his father's tobacco business. Because he was new to the craft, his father advised him to learn how to roll a cigar and how to grow tobacco. Edgar soon joined a small cigar company in New York City called Anton Bock. During that time, cigar makers used two-, three-, and four-year old tobacco, and blended them and aged them together. For three days each week, Edgar learned how to sort and shake Cuban tobacco, how to open bales, how to moisten tobacco, and how to count the leaves. He also learned how to roll cigars. The other two days, especially during the summer growing season, he spent his time in the tobacco fields or in the sheds, learning how to grow and cure the leaves that hung from rafters for initial curing. During the winter, he inspected warehouses where the tobacco was processed and bulked before it was sorted into grades.

1950s-90s: Expansion and Diversification

While Edgar continued to learn the craft of cigar-making and tobacco, General Cigar was turning its efforts toward research, developing new tobacco products and manufacturing techniques. In the 1950s, General Cigar introduced Homogenized Tobacco Leaf (HTL), a blended, continuous band of binder tobacco that not only allowed for a more uniform product and a milder taste, but also enabled the high-speed manufacture of the smaller-shaped cigars at significant cost-savings. General Cigar soon formed a separate department for its research and development efforts, and automated machinery and equipment, selling its machines to other manufacturers. General Cigar had neglected the marketing of its own cigars, however, and sales remained flat, hovering around $35 million into the mid-1950s.

General Cigar's R&D efforts began to pay off in the late 1950s, and its sales began a steady climb, to $45.2 million in 1956 and to $62 million in 1960. Licensing of its HTL systems and other equipment brought in growing income from royalty and licensing fees, from $680,000 in 1958 to $1.1 million in 1960. With about 37 percent of its common stock controlled by Bush Terminal Company, General Cigar gained a reputation as the industry's technological leader. Analysts noted the company's unbroken record of paying dividends each year since 1909. Per capita consumption of cigars had risen steadily through the 1950s, to 134 cigars per adult male per year, up from 116. By 1961, General Cigar was firmly entrenched in its second-place industry position, behind leader Consolidated Cigar Corp. Most of General Cigar's sales were in the low and medium price segments, with the Cigarillo dominating the five-cent segment, and its White Owl brand competing for leadership of the ten-cent segment. By then, General Cigar operated eight manufacturing facilities, four processing plants, and about 50 warehouses.

While the Cuban revolution placed a burden across the cigar industry, General Cigar controlled some 800 acres of tobacco-growing land in Connecticut, supplying more than half of its wrapper leaf needs. Nevertheless, the company was forced to write off its Cuban operations, and sales sagged. Late in 1961, Edgar Cullman led an investment group in the purchase of 37 percent of General Cigar's stock, raising that stake to 45 percent by the following year. Cullman soon assumed the presidency of General Cigar and began to revitalize its operations.

Among General Cigar's innovations was the introduction of a new Robt. Burns cigar, a Cigarillo with a plastic tip called a Tiparillo. The Tiparillo was launched with a heavy promotional campaign--estimated at around $5.5 million in 1962--featuring the slogans "Cigars, Cigarettes, Tiparillos?" and the soon-to-be famous "Should a gentleman offer a Tiparillo to a lady?" Sales began slowly, but by 1963, they had taken off, raising General Cigar's revenues to $69 million, and giving the company the dominant position in the small cigar market.

The Surgeon General's report on smoking in January 1964 proved a new--if short-lived--boon to the cigar industry. Throughout the following year, millions of cigarette smokers switched to cigars, and especially smaller cigars. General Cigar reaped the benefits of this movement, particularly with its Tiparillo brand. The company also introduced its Ultra homogenized wrapper tobacco, which, like HTL, produced substantial cost savings in cigar production, adding more royalties and licensing fees to the company's income. In order to meet the surge in demand, General Cigar expanded its production capacity.

The company also began a series of acquisitions in the 1960s, including Gradiaz, Annis & Co. and its premium cigar labels, and the Cullman Bros. Farms. In 1964, General Cigar expanded beyond cigars, with the acquisition of Metropolitan Tobacco Co. and New Jersey Tobacco Co., and into wholesale distribution, with activities focused on cigars, cigarettes, candy, tobacco, drugs, and other items. Year-end revenues for 1964 jumped to $193 million.

The 1967 acquisition of the Connecticut wrapper tobacco and nursery operation of American Sumatra Tobacco Corporation, followed by the 1969 purchase of Ex-Lax Inc for $33 million, helped revenues climb to $246 million. The mid-1960s boom in cigar sales lasted less than a year, however, which left General Cigar with production capacity far outreaching demand. The Ex-Lax acquisition had given the company a relatively stagnant product. To worsen matters, General Cigar almost immediately sold off that company's Feminine Hygiene division, which was the only one with growth potential. General Cigar next moved into the salted snack foods market. For $26 million, it purchased Bachman Foods subsidiaries, and Helme Products, Inc. and its smokeless tobacco.

The 1971 introduction of a new line of cigars, Tijuana Smalls, designed for the growing baby-boomer youth market, brought General Cigar's revenues to $265 million, at a time when cigar sales overall continued their long decline. During this period, General Cigar also initiated real estate development operations, converting portions of its 6,300-acre holdings into industrial and warehouse sites.

In 1971, General Cigar began making Macanudo cigars, having purchased a cigar producing facility in Jamaica, Temple Hall, and its Macanudo brand in 1968. The brand was made with a unique blend of tobacco grown by the company. Edgar Cullman brought his 30-plus years of tobacco experience to bear, and the wrapper was made from a specially developed, pickled, and processed seed of tobacco. In the 1970s, the company also purchased the U.S. rights for Partagas cigars from the Cifuentes family, who had been the maker in Cuba until Castro took over.

In 1976, in order to underscore its diversified operations, General Cigar changed its name to Culbro Corporation. By the end of the 1970s, the company's fortunes had dwindled. The Bachman brands of pretzels and potatoes were largely regional--marketed in Pennsylvania and in some northeastern states. Culbro attempted to take the Bachman label national, to the extent that the Bachman brand name was given to all of the company's snack products--which included the products of newly acquired Cains Marcelle Potato Chips Inc. and the potato/corn snack division of Fairmont Foods Co.--most of which had been local, yet successful brands. But the Bachman brand failed to inspire consumer interest and ran into distribution difficulties, so that, despite steady rises in the salted snack food market, Bachman began losing money, including $9 million on 1978 sales of $80 million.

At the beginning of 1980, Culbro sold off its Bachman division and took a substantial loss. Meanwhile, cigar sales slumped as new and stiffer tobacco taxes, and growing levels of smoking restrictions, were added across the country. Despite revenues of $430 million in 1979, Culbro followed its $4.5 million loss in 1978 with a loss of $21 million in 1979. The following year, Culbro left the proprietary drug market as well, selling that division, including Ex-Lax, to Sandoz Ltd. of Switzerland for $94 million, and returning Culbro to profitability. By 1987, Culbro had sold off its Helme Tobacco smokeless tobacco operations, and its Metropolitan Distribution Services, as well as the remains of its snack food business.

Despite these difficulties, Culbro still retained more than 6,000 acres of land, worth about $6 million at purchase price value, but many more times that if converted to industrial or residential use. Then, in 1983, Culbro acquired all of the outstanding shares of Eli Witt Company. Culbro's revenues began a steady climb through the rest of the decade, from $626 million in 1983 to $1.1 billion in 1991. Through Eli Witt, Culbro began a new string of acquisitions, including Certified Grocers of Florida, Inc., and Trinity Distributors in 1993, and the southern divisions of NCC L.P.s wholesale distribution business. As part of that last transaction, Culbro sold part of its Eli Witt common stock to MD Distribution Inc., reducing Culbro's share--and unilateral control--of Eli Witt to 50.1 percent. In April 1994, Culbro deconsolidated Eli Witt from its financial statement.

Nearly half of Culbro's 1994 sales of $185 million came from its General Cigar consumer products division, which by then included the distribution of the strong-selling Djeep lighters, sold primarily through Wal-Mart. Still the company struggled as its stock prices remained stagnant. Soon, however, the cigar industry would see a reversal in the long-time decline of cigar sales, primarily from a renewed interest in high-end and hand-rolled cigars.

In 1995, Tabacalera, a Spanish tobacco monopoly, offered $100 million for a 50-percent interest in the General Cigar division of Culbro. CEO Edgar Cullman, Jr., declined the offer, deciding instead to reinvigorate the company's original business, in particular its premium, high margin cigars, including the Macanudo and Partagas labels. The following year, Cullman opened a cigar lounge in Manhattan called Club Macanudo, which became extremely popular and profitable. He then began to consider a major acquisition in the cigar business, a transaction that might necessitate a public offering of Culbro stock. In order to receive the highest net dollars from an offering, it was felt that Culbro would be better preserved as a "pure play" cigar company. As a result, Cullman decided to split Culbro into two public companies that would operate independently. The tobacco business would belong to General Cigar Holdings and all nontobacco business would become a new company called Griffin Land & Nurseries. The split went into effect on February 27, 1997.

Also during this time General Cigar Holdings acquired the privately-held Villazon & Company, Inc., adding the brand to its growing list of premium cigars. Cigar consumption continued to increase in the closing years of the 1990s, stimulated by a number of factors that included the improving image of cigar smokers, an expanding base of educated, affluent adults in their 30s and 40s who enjoyed smoking cigars, and a high increase in restaurants and clubs where cigar smoking was encouraged. Although 1998 saw another slump, which the company attributed to a mismatch between buying patterns by retail outlets and consumption patterns, Cullman remained optimistic about the company's ability to regain success in the marketplace.

Through all the fluctuations in business, General Cigar Holdings remained a leading manufacturer and marketer of premium cigar brands, which now included the premium brands of Macanudo, Punch (MPP), Hoyo de Monterrey, Cohiba, and Partagas. General Cigar's mass market cigar sales included Garcia y Vega, White Owl, and Tiparillo. Still, the company's stock price began to dip, and investor worries were not eased when a lawsuit was brought against the company during this time by Cubatabaca, which alleged that General Cigar Holdings was guilty of trademark infringement.

1999 and Beyond: Major Deals with Swedish Match

Financial aid came in the form of an international conglomerate with deep pockets. In 1999, General Cigar Holdings entered into an agreement with Swedish Match AB to sell its mass-market cigar business, including its number one natural leaf wrapper brand, Garcia y Vega, along with White Owl, Tijuana Smalls, and Tiparillo, for $200 million in cash. General Cigar made the deal to focus more attention on its branded premium cigar business, which was the largest portion of the company's sales profits. The agreement would allow General Cigar to supply Swedish Match's tobacco needs. In addition, Swedish Match's sales force in the United States would sell a select number of General Cigar's premium brands then sold through mass-market distribution channels. Swedish Match would take ownership of two manufacturing plants in Alabama and the Dominican Republic, including machinery and equipment, inventories, and trademarks.

In January 2000 General Cigar Holdings was again taken private in a deal that saw Swedish Match acquire a 64 percent interest in the cigar maker. The remaining 36 percent would remain in the Cullman family. The move was made to help the cigar company improve shareholder value, and help both companies develop, expand, and consolidate the cigar business globally. The deal was closed in New York in May, positioning Swedish Match as a leading global cigar company, and allowing for General Cigar to tap into the former company's European market share.

By 2004, General Cigar Holdings had become the largest manufacturer and marketer of premium, imported, hand-made or hand-rolled cigars made with long filler and all natural tobacco leaf in the United States. Through its Culbro Tobacco subsidiary, it continued to grow, cure, age, and process most of the Connecticut Shade tobacco in the world. It was the owner of 1,100 acres of prime land in the Connecticut River Valley, and leased an additional 500 acres in Connecticut and 80 acres in the Dominican Republic to grow leaves and, recently, also Candela wrapper leaves. The company continued to demonstrate the Cullman family commitment to cigar tobacco leaf quality as well as its pledge to market and manage one of the most successful premium cigar making companies in the world.

Principal Subsidiaries: General Cigar Co., Inc.; Culbro Tobacco; Club Macanudo.

Chronology

• Key Dates:
• 1906: The Cullman family establishes a cigar-making business called United Cigar Manufacturers Company.
• 1917: United Cigar changes its name to General Cigar Company Inc. 1944: The company introduces Cigarillo, a scaled-down panatela cigar resembling a cigarette in size and shape.
• 1962: General Cigar begins promoting new Cigarillo cigar with plastic tip, called Tiparillo.
• 1971: General Cigar introduces Macanudo cigars, which become the company's most popular premium brand.
• 1976: General Cigar changes its name to Culbro Corporation to reflect diversified acquisitions.
• 1980s:Culbro sells several of its diverse companies to regain profitability.
• 1996: Company begins operating the Club Macanudo cigar bar in New York.
• 1997: Culbro Corporation is split into two public companies: General Cigar Holdings, Inc., and Griffin Land & Nurseries.
• 2000: Swedish Match buys 64 percent of General Cigar Holdings, Inc.